With Great Inflation, Comes Great Recession

The 2007-2008 Financial Crisis was a formative event in many of the lives of our generation. Many lost jobs, even homes. The entirety of the American economic structure felt unstable, as though it was on the imminent verge of collapse. Yet, when you look back at the data, it almost seems impossible to miss the inevitability of it all. Let’s take the housing sector, for instance:

The above graph shows the rough correlation between housing prices and inflation. As the graph clearly shows, for much of the late 20th century the value of median family homes closely mirrored the consumer price index. And that is as you would expect: as Americans make more, they can afford more, and when they can afford more, prices go up accordingly.

Yet somehow beginning around the turn of the millennium, perhaps even slightly before that, the value of a median family home began to increase at a rapidly faster pace than did the consumer price index. We see a huge differential form between the two values. Economically speaking, its a bubble. And like the bubbles you used to blow when you were a kid playing in your driveway, bubbles eventually burst.

We see an exponentially increasing value of the median family home, while the consumer price index continues to follow its linearly increasing trend. When the growth becomes unsustainable, when the difference between the two values becomes simply too much for the market to believe any longer, the bubble bursts. There’s a rapid and sudden devaluation of one value to match the other. All of a sudden, a house is worth 1/2 what you thought it was, or 1/2 what you bought it for. It’s an enormous financial windfall, and one prone to produce and fuel a serious economic crisis that affects the nation at large. As we saw in 2007-2008 and the years that followed, that’s just exactly what happened.

3 thoughts on “With Great Inflation, Comes Great Recession

  1. The graph provides great insight into the housing market and inflation during the 2008 financial crisis and before. On the graph, it is very clear that the very large gap between median family homes and the consumer price index became too large and eventually added to the financial crisis.

  2. This is a really cool graph, and from a literary perspective well framed by relatable analogies that keep the maybe “dry” information interesting. It’s nothing but upsetting to have people on Wall Street not only be completely aware of the financial crash that was approaching, but making bets on it to make profit off of the misfortune they were able to cause people as a result of sub prime mortgages. The phrase: “Too big to fail” is a level of power that should not exist independent of the government, and needs to be well monitored and restricted so we don’t have a repeat of the crash.

  3. Great graph! Companies like Fanny May and Freddie Mac were dishing out loans for homes like it was candy; knowing full well many people who accepted these loans could not pay it back. This created the bubble that you talk about and kickstarted the largest recession since the great depression! In a lot of ways, I feel that the economic recession of 2007-08 was imminent if not started by the housing market.

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